Land Securities Group Plc (LAND) Earnings Call Transcript & Summary

Good morning, everyone, and thanks for joining the live webcast of Landsec's 2020/'21 interim results. This morning's presentation will follow the usual structure, though for reliability purposes during this second lockdown, certain elements are prerecorded. So I'll give an overview of the results for the period and the key themes affecting our market, and then Martin will take you through the financial review and Colette will cover the portfolio. Martin's and Colette's segments have been prerecorded. After brief remarks on outlook and the summary, we'll open up for a live Q&A, with both Martin and Colette joining me on the line. When we delivered our full year results on the 12th of May, I was 4 weeks into my new role, and we were all 7 weeks into our first lockdown. Nonessential retail was still 5 weeks away from reopening, and the hospitality sector was still 8 weeks away. As we now deliver our interim results 6 months later, we are in the first week of a second national lockdown. Nonessential retail and hospitality are again closed, having been open for no more than 21 and 18 weeks, respectively, between lockdowns. So it has been an extraordinary 6 months. But I believe we can begin to take some positives from our experience and the situation we find ourselves in.

What the company has shown — and, more crucially, what its people have shown — is a capacity to deal with a crisis effectively, and that is beyond any doubt. From start to finish, our stance has been, and continues to be, one of realism, of taking the initiative, and of acting with responsibility. Even with the considerable difficulties of the last 6 months, the company is still in a fundamentally strong position, especially on the financial side, with a loan-to-value ratio of low 33% and solid portfolio liquidity. Over the centuries, London has recovered from numerous crises, and it is still today an appealing place for investors, which highlights how important our Central London portfolio is, along with its quality, resilience, and liquidity. Because of this fundamentally strong position, we are glad to be restoring our dividend together with these results. And we are also able to start looking past COVID toward the medium- and longer-term opportunities that we anticipate will arise. Growing obsolescence among older offices, together with major mixed-use/regeneration, are 2 areas in which Landsec is especially well positioned to generate value. And all of this, naturally, is captured in our new strategy, which we introduced at our Capital Markets Day 3 weeks ago. I noted that our way of managing COVID's impact has been to be realistic, proactive, and to act responsibly.

I'll give you a bit more detail on that. To start with, ensuring the safety of all who work at or visit any of our properties remains our top priority, as it always has been. When the first lockdown came, we rolled out COVID secure plans across the whole portfolio, and we have adjusted those plans thoughtfully as the restrictions evolved. Second, I have no doubt whatsoever that the necessity for collaboration has made our ties with customers stronger. That puts us in a good position going forward. Be it through the GBP 80 million customer support fund we launched, the constructive conversations about rent concessions or deferrals, or all the ways we have assisted office and retail occupiers alike with their own COVID secure measures, our collaborative approach has unquestionably been a bright spot of COVID. Turning to development, at our full year results we stated that we were taking care to keep optionality within our development program, so that we would not overcommit capital in an unsettled market. We held to that stance during the first half, and we have now chosen to move forward to completion on the 2 speculative projects where we believe the prospective risk-adjusted returns are the most attractive.

On top of the pre-let project we already have underway at 21 Moorfields, this brings our committed development pipeline to roughly 850,000 square feet, with an overall development cost of about GBP 950 million, and 67% of that is pre-let. We'll now pause the rest of our near-term development projects and keep them ready to restart once the market outlook settles down further. As Martin will tell you, our balance sheet is strong, and we keep managing our finances prudently. That same discipline applies to how we assess bad and doubtful debts for provisioning, where we've taken a suitably cautious stance. And we haven't had to draw on any government support whatsoever. Thanks to our proactive and responsible approach, Landsec has stayed in a fundamentally strong position, even though COVID has had an extreme impact in many cases. By keeping a net debt-neutral approach through the period, our loan-to-value remains low at just 33%, despite valuation weakness. And our portfolio keeps offering good levels of liquidity. Our Central London assets especially have the qualities that still appeal to investors around the world: modern, sustainable spaces, great locations, strong tenants and long lease terms.

The sale of 7 Soho Square at 4% above March book value was an excellent illustration of that. Plus, our commitment to sustainability keeps getting acknowledged. To give you an example, EcoAct placed us third among the FTSE 100 for our ambitious net 0 strategy and the way we report on sustainability. And as Colette will tell you, our leadership in this space is generating value and building resilience across the portfolio. We also hold quite a few medium-term mixed use regeneration opportunities in the portfolio, especially suburban London shopping centers, which carry substantial value-accretive repurposing potential. And the company's strengths extend past financial and portfolio matters. A track record, reputation and relationships are essential features of lasting business success. We have kept protecting ours carefully. And as I explained at our recent Capital Markets Day, the experience, expertise and capability of Landsec's people rank among its greatest assets, a strength we plan to leverage fully by making sure we nurture a culture of empowerment and accountability. Taken together, these strengths mean we can start looking past the near-term impact of COVID toward the medium and longer-term opportunities we anticipate will surface once the pandemic has passed.

Naturally, these remain uncertain times, yet the route beyond the pandemic—via widespread testing, improved therapies, and eventually a vaccine—is far more evident now than before. Consequently, we must strike a balance between handling short-term difficulties well and making sure the company is correctly positioned to capture fresh opportunities. There are 2 specific areas where Landsec is strongly positioned to generate substantial value. First, regarding Central London offices, it is evident that how people utilize workspace post-pandemic is going to shift. Tenants are reflecting more carefully on what the office means for their organization and their culture. What is becoming ever clearer, though, is that aging office properties will find it hard to adjust to a post-COVID era in which sustainability, adaptability and resilience will be essential—whether because of physical limitations, like lift or air handling capacity, or subtler factors, including health, well-being or sustainability credentials that matter increasingly to today's workforce. Second, urban mixed-use regeneration. Society's expectations of its built environment are evolving, sometimes quickly. Moreover, given sustainability goals like carbon net 0 by 2050, the necessary transformation cannot be achieved the way it perhaps was previously.

Landsec and similar organizations have an obvious opening to take a leading part in influencing that shift. Naturally, capturing these opportunities to the fullest requires that we possess the necessary resources, in both money and people. And on that front, as demonstrated earlier, our position is strong. A low LTV, a Central London portfolio marked by quality, resilience and liquidity, a track record, reputation and network of valuable relationships that were hard earned, plus the capability, expertise and experience our people bring. With those key themes shared, I'll now offer some color on how we view our core markets. First, Central London. Not surprisingly, COVID hit both occupier markets and investment markets hard. On the occupational side, office take up across the 6 months came to just 2.2 million square feet, roughly 1/3 of the long-term average. Space availability has risen as well, driving the vacancy rate to 6.5%, and the extremely low levels of physical occupancy have also weighed heavily on footfall and sales in Central London retail and F&B, which has yet to recover. And in previous directions, where higher vacancy has led to significant downward movements in rents, they have tended to be preceded by periods of strong rental growth and a high level of speculative supply in response.

The top graph on the right-hand side illustrates that in recent years, demand and supply have come into better balance, alongside the flight to quality—which means that although there may be some rental weakness in the near term, we can afford to feel more sanguine about how large that weakness will be for the best space. Some interesting statistics bear this out, and we believe they will have an important bearing on how the occupier market develops from here. Only 26% of the total available space is Grade A. The rise in availability is largely attributable to secondhand space, much of it tenant release. The lower graph shows this. Nearly half of the space under construction is already pre-let. And new space accounted for 48% of total take-up in the 6 months, well above the long-term average of 39%. On the investment side, activity dropped very significantly in the second quarter of 2020 before beginning to recover in the third quarter. The fourth quarter has started strongly, with some significant transactions exchanging or competing. So we see 3 key themes affecting the Central London office market over the next few years. Firstly, sustained investor demand for quality led assets led to financially strong occupiers on long leases—the type of asset that typifies much of the Landsec portfolio—with demand supported by the low interest rate environment globally and the relative value of London compared to other global cities.

Second, there's a split in demand among occupiers, with older secondary stock going obsolete faster while more modern, flexible, COVID-secure workspaces see stronger demand. For Landsec, this brings 2 advantages: first, it supports demand for high-quality workspace and, by extension, the values of our core portfolio; and second, faster obsolescence of older stock could create more redevelopment opportunities across the broader market over time. The third theme is a potentially swift evolution in how the workspace of the future is configured, used and let by landlords and occupiers. Over the next few years, an even wider range of propositions is likely to appear. With its strong track record and reputation, Landsec is well positioned to take a leading role here. Turning now to Retail. It's widely understood that COVID has sped up the structural trends already in motion, especially the shift to online retail. The key question for us is what that means for the prospects of our assets in our portfolio, in terms of both rent and value. Well, for our outlets, we continue to see clear signs that the model is resilient to online penetration. People come to our outlets for the day, intending to spend but looking for inspiration, making a day of it and enjoying the experience — all very difficult to replicate online.

During the weeks before the second lockdown, outlet sales would have demonstrated growth in both rental and value if not for COVID's very late impact. And because of the turnover-based character of the leases, the assets are not over rented. So the 2 principal challenges that shopping centers face do not apply to outlets, and we expect a strong recovery in them once the pandemic is over. As for shopping centers, the clear feedback from the CEOs of the 40 or so conversations we have had with occupiers, large and small, is that the physical store clearly has a role in an omni-channel world, but there will be fewer stores, with destination malls favored. But with the permanent change <<inaudible>> and even in prime malls there is likely to be surplus space that will need to be repurposed. As referenced in our Capital Markets Day, we estimate the ERVs need to fall 35% to 40% from their 2017/'18 peak to reach that sustainable level. And relative to September ERVs, this means around a further 15% fall. And 10% to 20% of our retail floor space is likely to be repurposed over time. The investment market for shopping centers, of course, remains stalled, primarily as a result of difficulties in underwriting sustainable rent levels and the perception of forced or motivated sellers in the market, including as a result of intu's administration.

The administrator's sale of intu Trafford Centre is one deal that people are watching especially closely. And this clearing of the market—maybe at some point in 2021—is going to be key when it comes to price discovery. So, having walked you through the main themes from what we announced today, I'll pass things to Martin and after that to Colette, who'll take you through the details.

Thanks, Mark, and good morning, everyone. Across the past 6 months, our customers and we alike have needed to adjust and react to the difficulties that COVID-19 has created. Every part of our business has felt the effects of the virus, though the ways and the degree have varied. I'll point out the areas where the impact hit hardest, but it matters to keep in mind that our balance sheet remains resilient and our financial capacity is significant. We have a strategy to put Landsec in position for growth, and the balance sheet to back it and to seize the opportunities that will inevitably come as we come out of the pandemic. First, a quick summary of how we performed. Revenue profit for the 6 months came to GBP 115 million. That is GBP 110 million lower, or 49%, than the prior period. COVID-19's effect across our portfolio drove this. I'll go through that movement in more detail shortly. Values fell 7.7%, or GBP 945 million, during the 6 months, which produced a loss before tax of GBP 835 million. Adjusted diluted EPS, which is derived from revenue profit, was also 49% lower, at 15.5p. EPRA NTA per share stood at GBP 10.79, down 9.5%, or 113p, since last March.

And we're paying a dividend of 12p for the half year, though I'll come back to that shortly. Let's turn now to how revenue profit moved versus the prior period. As this chart shows, the GBP 110 million fall in revenue profit came entirely from a GBP 118 million drop in net rental income. Nearly all of that decrease stemmed from COVID, which I'll get to in a moment. Gross rental income was down GBP 39 million, driven by lower turnover-related income, mainly from our hotels, which fell GBP 13 million, reduced car park income, which was GBP 7 million lower, and the loss of GBP 5 million from Portland House, vacated for redevelopment at the end of March 2020. That item is the only one wholly unrelated to COVID. Short-term income decreased by GBP 3 million, mostly at Piccadilly Lights, and roughly GBP 7 million came from the effect of CVAs and administrations. Net service charge costs held flat, excluding provisions for nonpayment. However, the biggest factor behind the net rental income decline was a GBP 85 million rise in bad debt provisions.

I'll go into this in greater depth shortly. Our net direct property expenditure came in GBP 6 million below the previous period. That reflects COVID-related cuts and postponed spending, along with a GBP 4 million provision release tied to ending one of our final Landflex leases. Net indirect expenses rose by GBP 2 million, since the earlier period gained from a larger provision release connected to share-based payments. Net finance expense fell GBP 10 million thanks to the liability management work done last year, lower prevailing interest rates, and more capitalized interest at our committed developments. Moving on to bad debt provisions. This slide shows how I've split the GBP 87 million charge for the period against revenue profit. In early April, we announced our GBP 80 million customer support fund. Its aim is to help the customers facing the greatest need, with particular emphasis on F&B occupiers and small and medium-sized businesses. As of today, we have agreed and documented GBP 20 million in concessions. That might look like a small share of the fund, but without a meaningful way to enforce rent collection, reaching and documenting agreements is difficult when occupiers can hold back rent with no consequences.

Beyond the rent concessions already agreed, during this period we set aside an additional GBP 45 million to cover unpaid rents, plus GBP 12 million for service charges. We also made a GBP 10 million provision for tenant lease incentives. Taken together, those items add up to the GBP 87 million charge against revenue profit for the period. Let me now put our provisions into some context. Looking at the provisions we have just taken against rents recognised in this half yearly accounting period, they amount to roughly 45% of every retail and leisure rent falling due across these six months. And on our balance sheet, of the total rent still outstanding, approximately 75% is covered by a doubtful debt provision. The reason I wanted to share that context is so you can assess and form your own judgement about how cautious our approach is. As matters currently stand, we do not expect to have to raise the level of our customer support fund. That said, our provisioning does reflect the rents that remain due, the fact that enforcement is still difficult, the challenge presented by a second — and hopefully shorter — lockdown, and the likelihood of further CVAs, which could put outstanding rent at risk.

To give you the full picture on this slide, over on the right-hand side, I’ve split the GBP 87 million P&L charge out by segment. And just to remind you, these are the new segments we set out at the Capital Markets Day. Moving on now to rent collection. Different companies, of course, will take different approaches when it comes to recognising rent and making provisions. I’ve already explained how we handle provisions. And here’s where our rent collection currently stands. The first column covers all rent due for this half year. That means the March and June quarter days, plus all monthly rents from April through September. The second column is just the September quarter day collections. Although the overall collection percentages appear similar, you should bear in mind that the September quarter day figures only include those paying rent quarterly. And in reality, plenty of retailers and F&B operators switched to monthly rents a long time ago. So within the September numbers, office accounts for roughly 62% of total rent due, whereas in the first column it makes up only 41%. As you can see, office rents are still being paid, while the effect of withheld rents in retail and leisure shows up across all the other segments, where the share of rent paid generally falls between 50% and 75%.

Let me also make one more thing very clear. A company can make its collection figures look better by pushing rent owed into a later period, so that it isn't payable yet, while still booking that rent as income in the period it belongs to. In our own figures, deferrals represent under 2% of the rent due. So let me move from income to valuation. As of 30th of September, the combined value of our portfolio stood at GBP 11.8 billion. The overall decline in valuation came to 7.7%, which is GBP 945 million. Let me begin by walking through how the valuers have built ongoing COVID-related worries about rent payment into the valuations. For Central London, the valuers have assumed a 6-month rent concession in the future as at 30th of September for retail and F&B, unless a revised agreement with the occupier is already in place. For retail outside Central London, a 3-month concession has been applied, while leisure activities, F&B included, get six months. Outlets and hotels are valued using assumptions of rising turnover, with no extra concessions. The overall effect of this on our valuation is GBP 72 million as at 30th of September, and it is entirely separate from the rent provisions we are carrying. Now let me turn to the individual segments, beginning with the Central London portfolio.

Central London accounts for 67% of our assets. In September, it was valued at GBP 7.9 billion, which is a 3.8% decline from March. Offices fell 2.3%, and on a like-for-like basis the portfolio was down 1.9%. Within that, like-for-like rental values decreased 1%, while equivalent yields saw negligible change. Our developments were down 3.9%, and proposed developments — that's Portland House and Timber Square — were down 9.4%, while assets in our development program were down 1.2%. London Retail, which is mainly the retail space beneath our office buildings, has felt the effect of the significant drop in office and tourist footfall, and values there were down 16.7%, with rental values down 16.5% and yields moving out 12 basis points. Other Central London is principally Piccadilly Lights, where value was broadly unchanged, as an increase in the valuation of the 3 medium-term arrangements offset lower income from the short-term arrangements. Regional retail, made up of our shopping centers and outlets, was valued at GBP 2.1 billion, representing 18% of our combined portfolio. Regional retail declined in value by 16.4%, with shopping centers down 20.4% and outlets down 8.8%. Rental values for shopping centers were down 14.4%, with a net equivalent yield moving out 42 basis points to 6.6%, and the contractual net initial yield now stands at 7%.

For shopping centers, the comparable yield spread runs from 6.3% at Bluewater — 6.9% initial — to 7.9% at Buchanan Galleries, 9.5% initial. At Outlet, rental values dropped just 1.3%, while equivalent yields widened 38 basis points to 6.3%. Turning to urban opportunities, which right now make up only 4% of our portfolio. Here, values declined 9.8%, with rental values off 5.8% and equivalent yields widening to 5.3%. In this category, the biggest drop came at south side, down 20%, which is closer to what we see in regional shopping centers, while the smallest decrease was at West 12, down 4.7%. And lastly, subscale, accounting for 11% of the portfolio. There, values fell 12.4% overall. Leisure assets were down 15.3%, as rental values declined 3.9% and equivalent yields widened 70 basis points to 70 -- to 7.1%. Our hotel portfolio was marked down 13.1%, with rental values falling by a similar amount, and those hotels most reliant on the travel industry experienced the steepest valuation declines. Retail parks lost 7.3% in value, with rental values down 6.1% and equivalent yields widening 16 basis points to 7.6%. So let's shift from valuation to our financing position.

Across those 6 months, adjusted net debt barely moved — it rose GBP 14 million to GBP 3.94 billion. Group LTV came in at 33.2%. That figure, though, leaves out the disposal proceeds from the Soho Square sale, which exchanged on the 30th of September and has been treated as sold. Once you include those Soho Square disposal proceeds, pro forma adjusted net debt stood at GBP 3.86 billion, with pro forma group LTV of 32.5%. The average cost of our net debt is 2.1%. Our next bond maturity falls in September 2023, and it amounts to only GBP 10 million, while not one of our revolving credit facilities matures any earlier than 2024. What all of this means is that our GBP 1.2 billion of cash and available facilities can readily be deployed toward opportunities over the medium term. Turning now to dividends. Back in July, we stated that we would reinstate the dividend alongside our interims. That is exactly what we have done today, at a level reflecting current underlying earnings. Since no Q1 dividend was paid, we are combining our Q1 and Q2 dividends into one dividend of 12p per share, payable on the 4th of January 2021.

Our plan is to pay a Q3 dividend at the end of March, and we'll confirm the amount in early 2021, then follow that with a final dividend in July. Depending on how the market looks at that point, the final dividend we propose will likely mean that dividends for the year are covered 1.2x to 1.3x by underlying earnings, which works out to an approximate payout range of 75% to 85%. That's consistent with what we told you at our Capital Markets Day last month. So let me wrap up. We've taken what we consider a cautious approach in providing for unpaid rent, but time will tell. Retail and leisure remain challenged, and the current lockdown does not help. Against that backdrop, it's helpful that the London office market -- the London office investment market keeps providing liquidity, so we can stay disciplined in how we fund capital investment through disposals. And our balance sheet has been resilient in the face of the pandemic, and we retain plenty of liquidity to manage future uncertainty and fund accretive opportunities. With that, let me hand you over to Colette.

Thank you, Martin, and hello everybody on this call. These truly are remarkable days we're living through. It won't come as a surprise that our results have come under pressure, especially on the retail side. However, that only captures part of what's happened, since we have recorded some wins over the past 6 months too. In particular, we have strengthened our relationships with customers, helping them get operational again following the first lockdown, steering them through this current lockdown, assisting with their lease commitments, and guiding them through government rules that keep shifting. What's more, as we mentioned at the Capital Markets Day, those conversations are underway as we consider the best way to optimize our Central London portfolio and how to reimagine our retail portfolio. I'll walk you through our operational activities as they stand today: Central London, regional retail, subscale and urban opportunities. Given that the Capital Markets Day took place only a few weeks ago, though, my focus will be on Central London and regional retail. So let me give you the headline figures. In London, our occupancy stands at 98%, we have delivered GBP 1.4 million of lettings, with GBP 6.2 million sitting in solicitor's hands. We have completed GBP 7.2 million of rent reviews at 1.2% above the passing rent. We have renegotiated GBP 3.2 million of income in response to COVID.

When it comes to our office WAULT, it stands at 8 years — among the longest in the sector. And we are capitalizing on the flexibility designed into the development program in order to manage capital expenditure and to optimize how we deliver into the market. Turning to our regional retail portfolio, the shopping centers remained open through lockdown for essential retail, and every asset was prepared to reopen on the 15th of June. We subsequently handled the capacity challenges arising from social distancing and the differing restrictions throughout the U.K. before heading back into lockdown. Since reopening, footfall across the portfolio matched the benchmark. Sales declined by less, yet performed worse than the benchmark. Nevertheless, those numbers mask substantial differences among locations and assets, as government guidance shifted and people changed their shopping patterns. I'll cover more on that later. At subscale, our retail and leisure parks continued trading during the first lockdown for Central Retail and takeaway food. Following the 15th of June, we witnessed broader opening before local and then national restrictions came back. Within the hotel portfolio, 21 hotels have reopened while 2 stay closed. That said, our rent has been heavily affected by the turnover-based nature of the leases. In Urban opportunities, our suburban London assets kept trading for essential retail throughout lockdown and fully reopened once the initial restrictions were lifted.

Those gains came as a result of remote working. And naturally, we keep moving forward on our plans to develop 8 million square feet of mixed-use space throughout the portfolio. So those are the main points. Now I'll walk you through what we've been doing. Naturally, safety comes first, and we've put in real effort to ensure compliance with every government rule and guideline. That has meant additional signage, additional security, additional cleaning, additional communication and, crucially, collaboration with our customers, store managers, facility managers, property managers, MDs and CEOs. The encouraging part is the positive feedback we've received for our proactive leadership. Conversations about rents and leases have taken up most of the last 6 months, and our GBP 80 million support fund is being used well as we engage with hundreds of customers, mainly in retail, leisure and F&B. This slide illustrates how the rent roll of those 600 customers breaks down. We work methodically through every group, beginning with the top 30, which account for more than 1/3 of the rent roll and have by now received GBP 20 million in concessions, with plenty still to do. Martin has addressed the CVA impact. So I'll simply note that where a legitimate tool exists to assist a business under stress, we'll cooperate with that business and have done so many times, and where we don't think that's the situation, we won't.

Now let's turn to our Central London portfolio. This year, the strength of what we own and the way we put customers at the centre has served us well. We're still 98% let, and the makeup of our customer base has safeguarded our income. That said, many businesses are putting off major decisions because of uncertainty, while moves for others have slipped. One probable consequence will be pent-up demand for longer-term solutions in 2 to 3 years' time. That dovetails nicely with our development pipeline, which I'll cover shortly. This set of circumstances has opened up opportunities that benefit both sides. We renegotiated 6 leases spanning 58,000 square feet, pushing lease terms out by an average of 9 months, with GBP 3.2 million of income secured. As you'd expect, letting activity in the first half is lower, at GBP 1.4 million, with another GBP 6.2 million sitting with solicitors. The main reason, though, is how little space we have available. During the summer, we did notice rising interest in pre-lets for top-quality, healthy and sustainable space. Our wide-ranging research, together with conversations with customers, is showing us how businesses are approaching their future office needs. Back in May, I mentioned the new scripts being written for offices.

Now let's look at a few of the trends behind what we're doing. We'll begin with how the first lockdown has affected us. In October, occupancy averaged 15%. That said, it differed from one part of the portfolio to another. Nova, for instance, stood at roughly 25%, while Eastbourne Terrace came in at just 10%. Digging into those numbers makes it plain the portfolio divides into 2 groups: banking, financial and professional services, whose offices hold more people, versus the creative, tech, media and government sectors, which hold fewer. Every one of our customers pointed to government guidance, transport and insufficient collaboration space as the difficulties they encounter when it comes to office utilization. As you might imagine, we remain in constant touch with all of them as we prepare to ramp back up in December. Beyond that lie the longer-term themes, and the mood music has shifted. At the start, the benefits of home working drew most of the attention; these days the discussion leans in a more balanced way toward hybrid models. It's dawning on people that the consequences of working from home stretch much further than merely not being in the office, spanning mental health and productivity through to wider worries about the economy. As a result, the right office space is now seen as one offering a healthy environment, one that supports collaboration, creativity and personal development.

Our offices have to meet those requirements. At lower densification levels and with greater open space, people are being accommodated. A healthy environment and sustainability are now central concerns — low carbon materials in fixtures and fittings, low energy use, and excellent air quality are no longer optional extras; they are essential for drawing in customers and employees. This has been a long-running effort on our part, and because we adopted these approaches early, we will secure resilient value over the long term. As we discussed at the Capital Markets Day, we are working toward a portfolio that is well certified. Greater flexibility is something we need to build. Customers, for instance, could pair a Blank Canvas core with extra pay-as-you-go space at Myo, where daily rates are currently being trialed. A growing number of customers want our expertise in designing, delivering, and managing their offices, which lets them concentrate on their core business. Our customized product is how we deliver this. At Dashwood — our 158,000 square foot building opposite Liverpool Street Crossrail Station — we are putting all of this into practice. Next I will explain how we balance the moving parts to produce a win-win for both us and our customers. We had been set to take vacant possession of floors 9 to 12, which were designated as our first Myo product in the city, but a customer occupying 3 floors had its new home delayed by 9 months and needed to remain longer.

Our goal was to be helpful, yet that posed an issue for Myo since we required 4 contiguous floors. A different tenant was seeking 8, which provided us with another route to those 4 contiguous floors. Therefore, in exchange for a premium, we reached an extension agreement with the first customer and a surrender with the second, and we secured 4 contiguous floors — a win-win for everyone. Work has begun, and we will come back to the remaining floors once they become vacant next year. That allows us to provide Blank Canvas, Customised and Myo within the building alongside Landsec Lounge. Let me spend a moment on the retail located on the ground floors. That area has suffered most from the weak office and tourist footfall across London's streets. Although it accounts for just 6% by value, the blend of amenity, services and place-making it delivers is essential to London's living and working ecosystem, yet the character of that need has shifted. As we stated at the Capital Markets Day, we need less coffee, more crèche, but that is only the beginning. Might they become collaboration spaces, affordable workspaces or collection points for online retailers? It is a chance for us to transform a problem into a new solution.

Moving on now to the development pipeline. We've previously talked about how we've broken this down into manageable pieces, which lets us halt every scheme apart from 21 Moorfields at different phases. That's a big plus in light of the pandemic. Before the pandemic, we had 1.4 million square feet spread over 5 office projects in the City, West End and Southwark, with delivery dates running from March '22 to February '23. We used the optionality built in to pause and reconsider the relative risk and reward, weighing a variety of factors including costs, future demand, the product, location, project size and construction complexity. Consequently, we chose to move forward with 2 speculative schemes, delivering 284,000 square feet with a commitment of GBP 381 million. Those 2 schemes are Lucent, Piccadilly Lights and The Forge in Southwark. Let me begin, though, with 21 Moorfields. Remarkably, work halted for just 2 weeks, which let the contractor replan and resequence activities for the new COVID environment. By putting money into new welfare facilities and taking up different working practices, they've been running at roughly 75% capacity since August. Completion is expected in June 2022, only 4 months behind schedule, and we're actively working with the contractor to limit any further delay despite current conditions.

Before diving into the specifics of our speculative projects, it's worth noting how our approach and planning have shifted in this new environment. We're securing contracts in a different way, adding notices to proceed at crucial milestones, which lets us keep a handle on activity levels at the site, spending and delivery timing as we work through these uncertain conditions. As you'd expect, we've adjusted our designs with a stronger emphasis on health, well-being and flexibility. A few instances of that: touchless access across the board, additional collaboration and creative areas plus more private workspace, reduced densification, greater divisibility, additional staircases to boost lifting capacity, and we're looking at alternate uses for retail space. Turning now to Lucent, the 144,000 square foot project behind Piccadilly Lights. There's nothing else comparable to it, and no office space in the vicinity quite matches it. Floorplates go from 3,000 to 25,000 square feet, with ample flexibility to split them into smaller units. We finished substantial portions of the basement piling work remarkably ahead of schedule, aided undoubtedly by the unexpectedly car-free streets of early lockdown. We're now preparing to sign a main contract with delivery in December 2022. The Forge is our 2 building, 140,000 square foot project in Southwark, with floor plates going from 3,000 to 15,000 square feet.

This is a fresh site for our Myo and customized products, and much like Lucent, it’s a unique offering for where it sits. The substructure works are set to finish in December, and the kit-of-parts trial has brought both time and cost efficiencies, which we’ll apply to delivering the project. We’re in active pre-let discussions for Lucent as well as The Forge. Castle Lane has been added to our program. Previously a hostel, it was acquired to supply affordable housing units that satisfy our planning commitments in Victoria. This scheme will deliver 88 units of affordable housing, which have been presold to Notting Hill Genesis, and the project is due to complete in April 2023. While these are the 4 schemes we’re moving forward with, we haven’t down tools on the rest. At Nova East, now called n2, on-site work is continuing to finish the core, and we’ll carry on with procurement and design development. At minimal cost, this lets us be ready to gear up in under 6 months. At Portland House, we now have planning concerns and are continuing predevelopment activity, securing vacant possession and stripping out the building, which will be done early next year. We’ll then pause and reassess market conditions, but we don’t expect further capital commitment for 12 months.

Over at Timber Square, the building remains occupied, and we've filed a planning application for a 380,000 square foot scheme, with hopes of getting consent in December. Once again, predevelopment work is carrying on. At Red Lion Court, we expect to submit an application early next year for 237,000 square feet. Until then, Lloyds is in place there on a lease running to June 2022. What all of that means is that we'll finish 21 Moorfields and Castle Lane — both de-risked — and we're putting GBP 381 million into 2 speculative schemes, delivering 284,000 square feet between June and December 2022. Smaller amounts are being spent to keep predevelopment going, which gives us optionality over when we choose to step up a gear. Moving on to investment. As Mark mentioned, the investment market stalled when the pandemic took hold, but activity has picked up over the last few months, with growing demand for prime buildings that are well let. Soho Square, which had only 3 years of income, went for GBP 78 million at a yield of 4%, which was 4.3% above the March book value. We expect interest to carry on despite this lockdown. Investment volumes for Q4 so far are ahead of Q3, with even more currently under offer.

That momentum is encouraging for the portfolio. While there isn't anything more specific we can share with you today, it is keeping us occupied. Let's now turn to our regional retail portfolio, which, as a reminder, covers our shopping centers and outlets. I've already discussed reopening and closing assets as well as rent collections. What I want to address now is sales and footfall, along with the efforts we're making to reimagine the portfolio for the future. Since reopening, footfall across the portfolio has been broadly in line with the benchmark at minus 39%. Overall sales performance sits below the benchmark at minus 26%, against a benchmark of minus 12%. That masks substantial variation between individual assets and, generally, a much stronger sales performance at the outlet. The outlets have bounced back well. Footfall was down 34% on last year, but sales were only down 17%, which demonstrates a much higher basket size and people shopping with a purpose. We saw a similar pattern at the shopping centers, where footfall was down 41% and sales only 32%. However, performance between assets varied because of their location. And significantly, given the differing restrictions across the U.K. before this lockdown, 3 of our 6 shopping centers were already operating under tighter local restrictions.

Moving on now to the five reimagine retail goals I outlined at Capital Markets Day, and I'll begin with establishing sustainable rents. Across our shopping centers, we've developed a perspective on what the long-term sustainable ERV is, and those figures sit on average 15% beneath the September ERVs — that works out to declines of 35% to 40% from peak to trough. Because of commitments already in place on existing leases, this won't produce an overnight shift, but it gives us a basis for making well-informed investment and leasing choices, and all of that helps us evolve the tenant mix as well as future repurposing opportunities. Turning to elevating the consumer experience: retailers have explained to us that driving footfall requires us to change both the push and the pull. The push today means collaboration — pooling our marketing and digital resources together with those of every retailer, which increases our collective reach. The pull concerns changing the mix. That mix has to connect with catchment demographics and be weighted toward growing sectors and relevant retail, which will bring in more convenience offers. Such an approach aligns more closely with the outlet model, where active brand churn responds to consumer demand. Drawing on our outlet experience and relationships, we can build a comparable approach across the shopping centers.

Initially, we’ve segmented customers based on relevance and growth potential, and that work remains on schedule for completion by December. We will then apply that information to guide leasing strategies tailored to each shopping center. Objective three involves achieving operational excellence and developing new leasing models. A further consistent point coming out of our discussions is that the leasing model needs to change, yet it is evident that no single approach fits every case. We are reviewing multiple models tied to the various customer segments, and because of existing lease commitments, this will take time, though we anticipate beginning to trial some concepts shortly. We remain on course to deliver a 4% reduction in service charges, on top of the 8% savings already achieved due to COVID. And, as you would expect, we are reviewing this once more. Beyond those immediate savings, we continue to examine ways to provide services more efficiently and thereby lower operational costs. Turning now to making the most of our vibrant outlets. The outlets have delivered strong performance, showing their continued attractiveness to customers and their resilience to increased online penetration. We have kept developing the mix, completing GBP 0.7 million of lettings to new brands, including Under Armour, Fiorelli and the Perfume Shop.

We've achieved solid advancement on the improvement projects at Braintree Village and Clarks Village, where GBP 2.5 million went toward upgrades of the public areas, creating a more attractive setting, plus store works that make brand rotation simpler. Despite the fact that they are shut right now, this effort is going to carry on. Last comes our fifth goal: repurposing retail space. The aim is cutting the volume of retail in order to build competitive tension and bring in new uses like offices and residential within the ecosystem. A master planning framework has been set up so our method for judging repurposing potential at every asset stays consistent, using macroeconomic, consumer, sector and market-specific data to guide our choices. Our target is to have master plans in place for the 6 shopping centers before the financial year ends. To sum up, this half year in extraordinary times hit our like-for-like performance yet sped up shifts in the way we operate. Our Central London office portfolio is full, and we are adapting our products for what lies ahead. Ground floor retail faces challenges, yet it is essential to London's living and working ecosystem and is going to change. We have reworked our development pipeline, leveraging the flexibility built in to control costs and delivery.

We are advancing on the 5 reimagine retail objectives. As before, we have assisted our customers in moving into the new lockdown. This time, though, nothing caught us off guard, and we are prepared to reopen on the 3rd of December. Naturally, challenges exist, yet opportunities exist as well. We understand what needs to be done, and we have a clear plan. I will now return the floor to Mark.

Thank you, Colette, and Martin as well. Over the next few minutes, I'll close out this morning's presentation, and then we'll move into Q&A. <<operator_script>> To begin this wrap-up, let me take you back to the strategy we launched at our Capital Markets Day 3 weeks ago — one that puts Landsec in position for growth, and one organized around 4 strategic priorities: optimize Central London, reimagine retail, realize capital from subscale sectors and grow through urban opportunities. This strategy envisages a greater degree of asset recycling — roughly GBP 4 billion of sales over the coming few years — concentrated on assets where we have already added meaningful value that can now be crystallized, and on portions of our portfolio where we are subscale with little or no competitive advantage. The proceeds then get reinvested in areas with strong growth characteristics, both cyclical and structural, and where Landsec's competitive advantage can be used to greatest effect. This strategy makes the most of a best-in-class Central London portfolio, leveraging its quality, resilience and liquidity so it can serve as a source of capital over time to rotate into higher growth areas, both in Central London and Urban opportunities. It is a strategy that makes the most of our track record and the strong relationships built up over time, and it will build on them further — customers, supply chain, public sector, potential partner capital.

This approach comes from a realistic look at what retail is up against, paired with a clear plan rooted in that reality—one where we'll make better, faster decisions, forge stronger ties with our retailer customers, and in the end make sure our shopping centers stay relevant while complementing our strong outlets operation. That approach can put Landsec at the center of substantial urban regeneration potential throughout London and key regional centers by fully using our development capability—opportunities that could speed up after COVID and that only developer investors possessing a track record, expertise and scale are able to unlock. And this approach is built to produce better total returns for shareholders over time. Three weeks ago at our Capital Markets Day, I wrapped up by laying out what you should expect from Landsec during the next 12 months as we carry out this strategy. And I figured it was worth restating that in light of these interim results. We will keep preserving our financial strength so we can capitalize fully on the opportunities we think will arise after COVID. You'll see more asset recycling, at first within our Central London portfolio, seizing on strong investor demand and achieving significant value creation.

We’re going to move our development pipeline forward in a measured way. Those 2 speculative projects that provide the strongest risk-adjusted returns, along with our pre-let developments already underway—above all 21 Moorfields. We’ll widen the variety of office offerings we bring to market, as Colette illustrated with a Dashwood example. You’ll see us make progress toward a new operating model for Retail—one that puts Landsec in an effective position for the shifting retail landscape. We’ll keep advancing our urban opportunities portfolio, especially planning across our existing set of projects, but potentially through new acquisitions as well. And we’ll take steps to establish the right culture and organization to support delivery of our strategy. So, as I said at the start, an extraordinary 6 months, framed at both ends by lockdowns. But there are reasons to be positive. We have handled the impact of COVID-19 proactively and responsibly, and we continue to do so. Our operational resilience and customer relationships, in particular, are stronger because of that. And part of that approach has been preserving financial strength and flexibility. Our business fundamentals remain strong. The quality, resilience and liquidity of our Central London portfolio is a particular strength. And because of that, we can start looking past the pandemic to the medium- and longer-term opportunities we believe will emerge—accelerated obsolescence of older London offices and the need for major mixed-use regeneration being the 2 most prominent, which, in many ways, makes it a good time to have launched our new strategy, a strategy that positions Landsec for growth.

Ladies and gentlemen, I appreciate everyone spending part of your morning with us. Just as we said we would, I'll now take your questions. First I'll turn to the conference line to see what questions are waiting there, and after that I'll go to the webcast facility for anything sent in through it. Thank you.

<<operator_script>> Today's initial phone question comes from Max Nimmo at Kempen.

Just — you brought up Trafford Centre and the possibility of that transacting. I was quite keen to hear your perspective on whether you think valuations will treat that as an arm's length transaction, depending on who ends up getting it. And obviously there have been some rumors of very low ball offers around there. So I just want to understand your view on what kind of read across that could mean for your portfolio? And second, on the outlets business, I'm just trying to reconcile what you're saying about it being a robust sector. Yet, we're still seeing yields pushing out sort of 38 basis points, values down 9%. Is that because of how the valuations are approaching the risk to turnover rents? And could you maybe comment on the GBP 0.7 million of new lettings, where they sit versus passing rent?

Thank you, Max. So regarding what else — I'll share a few thoughts about Trafford Center as well as values. Then perhaps I'll invite Martin to add any comments specifically around valuation, and Colette to discuss the new lettings that you brought up. So I believe the reason we cited Trafford Center as a significant transaction is mainly because, as an asset type, it would be regarded as among the strongest assets within the shopping center — the regional shopping center — sector. So I think it has meaningful parallels with Bluewater. But you made a very fair point that, given the relatively complicated nature of the deal and the fact that the asset itself cannot be separated from the capital structure that buyers will inherit, that does, I think, make it harder to draw a read across. But truly, with essentially no other transactions to speak of, I think it is something that will be examined fairly closely. And I think in time, we will gain a bit more clarity on how people — how prospective bidders and buyers — are viewing the sustainable rent line within that, as opposed to an immediate initial R&D equivalent yield, because I think that, as we flagged at our Capital Markets Day and, again this morning, getting a handle on that sustainable rent is the first thing that needs to happen for markets to then begin to gain confidence in valuation.

Since the cap rates we’ve baked into today’s results for retail look quite generous when set beside other sectors, that’s the first thing to note. Of course, the other side of that coin is that right now it’s hard to work out and truly pin down which rent you are capitalizing within that yield. So I think that’s an area where interesting evidence could emerge as time goes on, but you’re right to point that out, because given the complexities of the Trafford Center’s capital structure, yes, it won’t be the perfect piece of valuation evidence. Still, I think it will serve as an important reference point. On outlets and values, and why we’ve seen a decline there, I’ll turn to Martin shortly to comment in more detail on how the valuers have gone about things. But I think there’s probably some degree of caution in that approach. And probably a view that the wider retail sector is under pressure, so in relative terms, does there need to be some reflection with our outlets? What I will repeat is the positives we see within our outlets portfolio and why, in our strategy at the Capital Markets Day and again today, we have sought to decouple how we look at this performance from wider retail.